European ways hinder economic prosperity

From a speech by the chairman of the US Federal Reserve Bank, Alan Greenspan, given at a symposium in Jackson Hole, Wyoming

Globalization, as most economists understand it, involves the increasing interaction of national economic systems. Of necessity, these systems are reasonably compatible and, in at least some important respects, market-oriented. Certainly, market-directed capitalism has become the paradigm for most of the world, as central-planning regimes have fallen into disfavor since their undisputed failures around the world in the decades following World War II. But there remains an active debate over the elements of capitalism that are perceived as most essential for a productive civil society.

Globalization, as most economists understand it, involves the increasing interaction of national economic systems. Of necessity, these systems are reasonably compatible and, in at least some important respects, market-oriented. Certainly, market-directed capitalism has become the paradigm for most of the world, as central-planning regimes have fallen into disfavor since their undisputed failures around the world in the decades following World War II. But there remains an active debate over the elements of capitalism that are perceived as most essential for a productive civil society.

The failed experiment in central planning in Eastern Europe and the Soviet Union after World War II has largely muted the arguments of the most ardent socialist planners. The debate has now shifted to the nature and extent of actions appropriate for governments to take in order to ameliorate some of the less desirable characteristics that are perceived to accompany unfettered competition.

But little unfettered competition is practised today. In large part, driven by the values of our societies that developed out of the Great Depression, some government regulation is practised virtually everywhere.

None the less, even among those who deride unbridled forms of capitalism, there is a growing awareness that many attempts to tame such regimes are not without cost in terms of economic growth and the average living standards of a nation.

A recent manifestation of these costs can be seen in the lower level of high-tech capital investment in continental Europe and in Japan relative to that in America. Arguably this outcome has resulted to an important degree from the legal structures and customs that govern labor relations in much of Europe and Asia. By choice over the decades, Europe, for example, has endeavored to protect its workers from some of the presumed harsher aspects of free-market competition. To discourage lay-offs, discharging employees was made a difficult and costly process in comparison with that in the United States. By law and by custom, American employers have faced many fewer impediments to releasing employees.

This difference is important in our new high-tech world because much, if not most, of the rate of return from the newer technologies results from cost reduction, which largely means the reduction of labor costs. Even though the technologies are available to all, the intensity of their application and the accompanying elevation in productivity are more clearly evident in the US and other countries with fewer impediments. The increased ease of lay-offs in the US, by reducing the risks of hiring by American employers, has contributed to a higher rate of employment compared with the majority of our major trading partners.

In an effort to raise returns on domestic assets, many governments, European and others, are being led away from former dirigiste regimes to place greater reliance on markets. Recent plans for tax reforms, significant initiatives to create more flexible labor markets and ongoing steps toward greater privatization in Europe underscore the extent to which views have changed in recent years.

But it is clearly pragmatism, not ideology, that is the main driving force in these evolving views. Any notable shortfall in economic performance from the standard set in recent years runs the risk of reviving sentiment against market-oriented systems. At present, such a shortfall is not anticipated and such views are not widespread. But they resonate in some of the arguments that emerged in Washington and Seattle over the past year.

It is almost surely the case that the longer the process of globalization of economic activity continues, the more firmly entrenched will be the gains. But our past endeavors at long-term forecasting afford us little confidence in being able to anticipate seminal changes in global economics. We cannot, however, refrain from reflection.